The Online Library of Liberty

A project of Liberty Fund, Inc.

• Titles In the Liberty Fund Library of the Works of Ludwig Von Mises
• Acknowledgments
• Preface
• Introduction
• Monetary and Economic Policy Problems Before, During, and After the Great War
• Part 1: Austro-hungarian Monetary and Fiscal Policy Issues Before the First World War
• Chapter 1: The Political-economic Motives of the Austrian Currency Reform 1
• Chapter 2: The Problem of Legal Resumption of Specie Payments In Austria-hungary 1
• Chapter 3: The Foreign Exchange Policy of the Austro-hungarian Bank 1
• Chapter 4: On the Problem of Legal Resumption of Specie Payments In Austria-hungary
• Chapter 5: The Fourth Issuing Right of the Austro-hungarian Bank 1
• Chapter 6: Financial Reform In Austria 1
• Chapter 7: The General Rise In Prices In the Light of Economic Theory 1
• Chapter 8: On Rising Prices and Purchasing Power Policies 1
• Chapter 9: Disturbances In the Economic Life of the Austro-hungarian Monarchy During the Years 1912-1913 1
• Part 2: Economic Policy Issues In the Midst of the Great War
• Chapter 10: On the Goals of Trade Policy 1
• Chapter 11: Inflation 1
• Chapter 12: On Paying For the Costs of War and War Loans 1
• Chapter 13: Remarks Concerning the Problem of Emigration 1
• Part 3: Austrian Fiscal and Monetary Problems In the Postwar Period
• Chapter 14: Monetary Devaluation and the National Budget 1
• Chapter 15: For the Reintroduction of Normal Stock Market Practices In Foreign Exchange Dealings 1
• Chapter 16: On Carl Menger’s Eightieth Birthday 1
• Chapter 17: How Can Austria Be Saved?
• Chapter 18: The Claims of Note Holders Upon Liquidation of the Bank 1
• Chapter 19: The Austrian Currency Problem Thirty Years Ago and Today 1
• Chapter 20: The Restoration of Austria’s Economic Situation 1
• Chapter 21: The Austrian Problem 1
• Chapter 22: The Gold-exchange Standard 1
• Chapter 23: The Social Democratic Agrarian Program 1
• Chapter 24: America and the Reconstruction of the European Economy 1
• Chapter 25: The Currency and Finances of the Federal State of Austria 1
• Chapter 26: The Economic Crisis and Lessons For Banking Policy 1
• Part 4: Interventionism, Collectivism, and Their Ideological Roots
• Chapter 27: The Economic System of Interventionism 1
• Chapter 28: Economic Order and the Political System 1
• Chapter 29: Remarks Concerning the Ideological Roots of the Monetary Catastrophe of 1923 1
• Appendixes
• Appendix A: Maxims For the Discussion of Methodological Problems In the Social Sciences: Paper Delivered At the Private Seminar 1
• Appendix B: Short Curriculum Vitae of Mayer Rachmiel Mises of Lemberg 1

CHAPTER 24

America and the Reconstruction of the European Economy1

Politically, Europe can expect no help from America for the solving of its own problems. Even in purely economic policy matters it is a fantasy to expect a remedy from the United States for the plight of Europe.

Until the final decade of the last century the United States was principally a supplier of raw materials and an importer of manufactured goods. For decades Europe constantly invested capital in the United States. The big factories that developed the wealth of the American economy had been financed by European capital. A generation ago three-fifths of all American railroads were controlled by London.

Although in the last years of the nineteenth century America had already begun to buy back occasional parcels of American securities from Europe, the debt of the United States to Europe rose constantly until the outbreak of the World War. Even conservative estimates calculated that at the outbreak of the World War the debt of the United States to Europe amounted to more than five billion dollars.2 While England and the capitalist states of the West were in first place among the securities holders, even Austria participated, although with modest amounts. The United States paid the interest on these debts by its enormous, yearly rising balance-of-trade surplus, which no longer only resulted from the export of raw materials but also, now, in large part from the export of staple commodities and manufactured goods.

Even if the World War had not intervened, no doubt in the course of a number of years the rising surplus of the American balance of trade would have enabled the United States to pay off its debt to Europe and to change from the role of a capital-importing to that of a capital-exporting country. The war enormously accelerated this development. Within a few years—almost overnight, one could say—America became the great banker of the world.

At the end of 1925 American capital investment abroad was estimated by the Department of Commerce to be $10.5 billion, in comparison to about $3 billion of foreign capital investments in the United States. This does not include, however, the debts among the Allies. The trade balance from interest and capital gains is put at $355 million by the U.S. Commerce Department, to which $160 million in interest on debt owed by the Allies must be added. If one includes the surplus trade balance of $660 million plus film rental charges of $75 million, it comes to a total of $1.424 billion on the credit side of the ledger. The counter-entries in the American balance of payments are the expenditures of travelers in the amount of $560 million, $310 million sent back home by immigrants, and some smaller items coming to $63 million, adding up to a total of $922 million. The difference of about a half billion dollars is covered by the surplus of new investments of American capital abroad beyond the sum of the repayments of debts and the purchase of American securities by foreigners.

It is estimated that in recent years new capital formation in the United States has amounted to about $10 billion, of which one to two billion are available for investment abroad. These are large amounts; they cannot, however, be fully counted upon. Against them one must put the mentioned repayments and purchases by foreigners. One must further consider that the limitation on immigration into America will finally bring about a reduction in the remittances of immigrants, since naturally the immigrants who have already been living in the United States for a long time and who have established families there hardly come into consideration in regard to money sent back home. The immigrants who go to America only for a short time and then return to Europe with their savings are basically not worth considering in the present circumstances.

With the rising standard of living in the United States and the organization of transoceanic steamship traffic, the number of Americans traveling abroad will grow, as will the sums they spend while visiting abroad. On the other hand—and this is perhaps most important—it is to be expected that America’s trade balance surplus will decrease. The assumption that the American balance of trade must soon become negative is no doubt exaggerated. It is, of course, true that in the first eight months of 1926 there occurred an excess of $84 million in imports over exports; but that the inferences drawn from this were too hasty is shown by the fact that in September the American balance of trade had a surplus of $105 million.

Moreover, it would only be natural for America, as a creditor nation, to have a negative trade balance. The debtors to America really have no way to pay the interest and dividends they owe other than by the supplying of goods. American economic policy, which seeks to keep out foreign goods by an extremely high tariff system, must, in the end, collide with its investment activities abroad.3 All reasonable Americans admit that its high-protective-tariff policy is inconsistent with the desire of the United States for the Allies to be able to pay the interest on and amortize their debts.

Nevertheless, the idea of a protective tariff is still extraordinarily popular in the United States today. It has support in those industries that demand duties to compensate for the difference in costs of production between the United States and other countries. The literal fulfilling of this desire would make any importation to the United States impossible, since, logically, only those goods can be imported into the United States for which the costs of production are lower abroad. The same goes for the demand by labor that all those goods be excluded from being imported into the United States that are produced abroad at lower wages. Since, as a consequence of the ban on immigration, wages are necessarily higher in America than anywhere else (with the exception of Australia), this too would mean a complete prohibition of imports. Essentially even the demand for allegedly more “reasonable” tariffs amounts to the same thing, because a “reasonable” tariff is generally understood to mean one that makes it possible for domestic goods to compete successfully against foreign goods.

Even the farmers are partly in the camp of the protectionists insofar as they produce products that are in competition with foreign goods exported to the United States. The majority of American farmers realize, of course, that as an interest group concerned with exporting a part of their produce, they cannot benefit from a protective tariff. They suffer from the fact that labor is made more expensive by the laws restricting immigration. At the same time, the prices for industrial products are raised due to the high protective tariff,4 while the farmers have been seriously affected by the fact that agricultural products have suffered a severe decline in price. It is the farmers who insist that the United States work toward a solution of the political conditions in Europe in order to strengthen European consumption demand for American goods.

In terms of America’s domestic economic policy, it is becoming a more and more prevalent idea that the government should control the economy.5 As a capital-exporting country, the United States understandably—but not logically—disapproves when other countries follow the same foreign economic policy that it practices toward other nations. The United States forcefully opposes efforts by Mexico to bring production under the controls of the state. As a creditor nation, America must act against the attempts to nationalize and expropriate foreign-owned property; and in the case of Mexico, U.S. resistance goes so far that bellicose developments are not beyond the realm of possibility.6

America’s bad experiences with debtors’ unwillingness to pay, on the one hand, and the reduction in its balance of payments surplus, on the other hand, could result in the United States economically withdrawing into its own territory to a far greater degree than is the case today. American industries that have enormously increased their production capacity, partly in the expectation of finding more favorable opportunities for the sale of mass-produced articles on the world market, will have to make adjustments. This will mean the United States will both import less and export less, and especially invest less capital abroad.

Only an end to the general opposition to international trade can prevent such a development. There would have to be a general elimination of tariff restrictions, as well as debtor nations renouncing, under whatever name, those policies that threaten foreign capital invested within their borders and therefore limit new capital investments.

Nevertheless, the United States is still rich enough to make significant financial sums available for the economic reconstruction of Europe. But America is not prepared to furnish the political, economic, or ideological leadership for this reconstruction. It is a mistake to assume that the United States can contribute anything for the economic rebuilding of Europe other than financial capital, for which profitable investment possibilities should be exploited.

[1. ][This article originally was published in German in Mitteilungen des Hauptverbandes der Industrie [Reports of the Chief Association of German Industry], vol. 8 (1927). It was first delivered as a lecture at a meeting of the Austrian Industrial Association. During the three months from March 9 to May 31, 1926, Mises had toured the United States under the financial auspices of the Laura Spelman (the Rockefeller) Foundation, visiting and lecturing in a dozen cities.—Ed.]

[2. ][This would be approximately $109.4 billion in 2010 dollars. In 1913, U.S. Gross Domestic Product (GDP) was 39.1 billion, or $855.8 billion in 2010 dollars. Thus, U.S. debt to European creditors was about 12.8 percent of GDP.—Ed.]

[3. ][In 1922, the U.S. Congress passed the Fordney-McCumber Tariff Act, which increased the average ad valorem tariff rate to 38.5 percent, as a protectionist measure against foreign imports. It soon resulted in retaliatory trade restrictions against American goods in France, Spain, Italy, and Germany. Three years after Mises wrote this article, the U.S. Congress passed the Hawley-Smoot Tariff in 1930, which imposed an effective tax rate of about 60 percent on foreign imports into the United States, which again soon resulted in trade retaliation on the part of many other nations. The Hawley-Smoot Tariff is usually credited with exacerbating the intensity of the Great Depression, with international trade declining by around 30 percent during 1930-33.—Ed.]

[4. ][American farm groups attributed the rise in the prices of many manufactured goods used in agriculture to the reduction in foreign competition due to tariff restrictions on imports. For example, it was estimated that between 1918 and 1926, a fourteen-inch plow had doubled in price from $14 to $28; mowing machines from $45 to $95; and farm wagons from $85 to $150. On the other hand, by the mid-1920s, much of European agriculture had either normally recovered from the destruction and disorganization of the First World War, or had been artificially stimulated by government protectionist measures; as a consequence, American food exports to Europe had significantly decreased and, therefore, lowered American farming revenues from export sales.—Ed.]

[5. ][See Ludwig von Mises, “Changes in American Economic Policy,” (1926) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 2, Between the Two World Wars:Monetary Disorder, Interventionism, Socialism, and the Great Depression (Indianapolis: Liberty Fund, 2002), pp. 160-62.—Ed.]

[6. ][The Mexican Constitution of 1917 declared that the private ownership of land was no longer a right but a privilege, and that the state possessed the authority to seize land and redistribute it in the national interest. This included restrictions on foreign ownership and use of land and resources in Mexico. It finally culminated in the Mexican government’s nationalization of American and other foreign-owned oil companies in 1938. See Ludwig von Mises, “Mexico’s Economic Problems,” (1943) in Richard M. Ebeling, ed., Selected Writings of Ludwig von Mises, vol. 3, The Political Economy of International Reform and Reconstruction (Indianapolis: Liberty Fund, 2000), pp. 203-54.—Ed.]